Australia’s best business writer, Alan Kohler, wrote an interesting article on Wednesday, comparing the BHP merger with Billiton to an act of corporate “terrorism” or a “hijacking”. Kohler’s figures are quite startling. The terms of the all-scrip merger were that BHP shareholders received an interest of 58% of BHP Billiton, with the former Billiton shareholders collecting 42%. At the time, many commentators alleged that BHP was vastly overpaying for Billiton by around $2 to $3 billion.

According to Kohler, those estimates were far too generous to BHP’s incompetent management. Firstly, the deal was never really a merger, rather, it was more of a reverse takeover. Billiton’s South African boss, Brian Gilbertson became CEO of BHP Billiton, only to flee a year later with an estimated $30 million of BHP shareholder’s money.

Second, when Kohler looked at the assets brought to the table by BHP and Billiton, it is clear that BHP didn’t slightly overpay, but rather they were robbed blind. That is because the assets that BHP brought to the table included the blue chip copper mine at Escondida, hefty oil and gas businesses (including a stake in the North West Shelf LPG development) and the Australian iron ore assets. By contrast, Billiton’s assets were far riskier and were “dominated by [its] South African aluminum smelters”.

As Kohler noted, the assets contributed by Billiton contributed a measly 23% of BHP Billiton’s profit last year. This was partially due to skyrocketing copper, iron and oil prices but a weak aluminum market. This means that BHP overpaid for Billiton by a staggering $26.6 billion. Yes, $26.6 billion. That is five times the amount of the HIH bankruptcy. In fact, the amount that BHP overpaid for Billiton is considerably more than the market capitalisation of Coles Myer, Australia’s largest employer.

The two men who were instrumental completing the Billiton merger were Don Argus (then Chairman) and Paul Anderson (then CEO). Staggeringly, both men remain on the BHP board. Argus is still chairman of the dual-listed miner, and collected a handy $490,000 directors fees last year (plus more than $200,000 retirement benefits).

While BHP (rightfully) received a barrage of criticism for its billion dollar Magma Cooper and HBI blunders, those losses pale in comparison to what has turned into the worst business decision ever made by an Australian company.

Peter Fray

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